This article first appeared in The Edge Financial Daily on August 20, 2019

Pentamaster Corp Bhd
(Aug 19, RM3.68) 

Maintain add with a higher target price of RM4.20: Pentamaster Corp Bhd’s earnings margin before interest, taxes, depreciation and amortisation expanded 4.1 percentage points quarter-on-quarter (q-o-q) to 31.1% on higher automated test equipment (ATE) and factory automation solution (FAS) sales and better economies of scale from a larger volume of repeat orders. 

Overall, the group’s core net profit (CNP) rose 23% q-o-q to RM24 million, after excluding one-off items such as a RM2.1 million allowance for doubtful debt and a RM2.4 million inventory write-off. Pentamaster has an outstanding order book of RM239 million, based on purchase orders secured from its customers as at end-June 19. The ATE segment made up 90% of the outstanding order book, and the FAS the remaining 10%.

Its revenue for the first half of financial year 2019 (1HFY19) grew 18.8% year-on-year (y-o-y), driven by higher contributions from ATE, FAS and smart solutions, growing 16%, 40% and 9% respectively. Stronger ATE sales were driven by higher demand for smart sensor test equipment and three-dimensional (3D) sensing dot projector assembly and test equipment for the telecommunications sector. The group also delivered higher i-ARMS solutions, driven by a capacity expansion at the Batu Kawan plant. Overall, Pentamaster posted a CNP of RM43.6 million for 1HFY19 against RM21.2 million for 1HFY18.

We raised our forecast FY19 to FY21 earnings per share (EPS) by 6% to 7% to reflect improving margins from newer testing equipment and a stronger interest income. We expect better earnings delivery for 2HFY19, driven by a new tester for vertical cavity surface emitting laser (VCSEL) wafer level testing and burn-in machine, a higher utilisation of the Batu Kawan plant and a positive momentum in 3D-sensing adoption among Android-based smartphone players. 

In addition, the group’s diversification towards automotive is gaining good traction given the automotive segment delivered a 28% y-o-y sales growth in 1HFY19. Hence, we see the ongoing growth in electric vehicles coupled with the VCSEL technology, with a dominant presence in light detection and ranging applications in automotive, offering attractive opportunities.

Following our earnings upgrade, we pegged our valuation to a higher 19.6 times for FY20F — a 10% premium to the semiconductor equipment sector mean of 17.8 times in view of a stronger earnings projection of 26% for FY18 to FY20 EPS compound annual growth rate versus the sector mean of 17%. Potential rerating catalysts are a rising penetration of 3D sensing in smartphones, new customer wins in China and a weaker ringgit against the US dollar. Key downside risks are delays in 3D-sensing adoption for smartphones and an intense competition. — CGS-CIMB Research, Aug 19